Regional oil flows at risk as Iran mulls closure of Hormuz

Regional oil flows under threat: A forced shutdown of the Hormuz Strait is emerging as a possibility as Iran mulls its next moves after the US struck its nuclear facilities on Sunday morning, raising fears of widespread crude trade and shipping disruptions in the region. A closure of the strait — through which about 30% of the world’s crude flows — could lead to widespread disruptions to the flow of regional energy exports, possibly bringing crude prices to over USD 100 per barrel, Mees reported.

A chokepoint: The strait is an example of a trade chokepoint, a narrow passage on a vital global sea route, and is essential for energy security, according to the US Energy Information Administration. Even temporary disruptions can cause significant oil supply delays, higher shipping costs, and a potential rise in global energy prices. The waterway sees 20 mn barrels of crude oil pass through per day, accounting for up to 30% of world oil trade, according to a factsheet (pdf) by the International Energy Agency (IEA).

How serious is Iran? The possibility of a Hormuz closure is now at an all-time high after the US struck Iran. While several analysts prior to the attack had estimated that the risk was low, Iran’s parliament has reportedly voted to shut down the strait. The country’s national security council is now expected to make a final decision on whether to go ahead with the move, Al Arabiya reports. “Iran reserves all options to defend its sovereignty, interest, and people,” Iranian Foreign Minister Abbas Araghchi said in a post on X yesterday.

Strait closure will “paralyze” Gulf, expert warns: Any measure to restrict movement in the Strait of Hormuz will “paralyze the [Arabian] gulf and impact the entire world,” Iraqi economist Hilal al-Taan told Shafaq News. Notable ports like UAE’s Jebel Ali, along with oil-reliant nations Iraq, Bahrain, and Kuwait, will incur catastrophic financial losses, al-Taan said.

Saudi can reroute flow: Saudi Arabia — which accounts for 38% of the crude trade flowing through Hormuz as of 2024 — possesses substantial bypass pipeline infrastructure that could alleviate the impact of a Hormuz closure, though these alternatives come with notable constraints. One key bypass is the 1.2k km East-West pipeline that stretches from Abqaiq near the Gulf to a Red Sea terminal at Yanbu, Mees reported. The pipeline itself has a 5 mn bpd capacity, with the option to expand at short notice to 7 mn bpd.

But there’s a catch or two: Pivoting to the Red Sea as an export base, however, carries several challenges. The pipeline is used to shuttle some 1.48 mn bpd necessary to power Yanbu and Rabigh refineries in the west, taking away from its capacity to carry crude oil for exports, Mees reported. Limited tankage capacity at Yanbu and Yanbu South facilities in comparison to Aramco’s main export terminals on the Gulf Coast adds to the limitations.

UAE also has alternatives: The UAE can also export approximately 1.5 mn barrels per day of crude oil via a pipeline that runs from its oil fields to the port of Fujairah on the Gulf of Oman, allowing it to bypass the Strait of Hormuz, Bloomberg reported. The country’s Adcop pipeline connects Adnoc's Habshan crude oil processing plants to the Fujairah export terminal in the Indian Ocean, a location that hedges against Hormuz chokepoints, Mees reported.

Iraq could be in a bind: Technically, Baghdad can export volumes through Turkey via the 1mn b/d crude oil pipeline from Kirkuk to Ceyhan, but this has been closed since March 2023 amid a dispute with the Kurdistan Regional Government, Mees reported. Even if the pipeline resumes operations, it is not connected to Federal Iraq’s primary production base in Basra and can only handle more modest volumes of around 500,000 b/d from Kurdistan and Kirkuk.

And rerouting isn’t an option for some: The Strait of Hormuz remains Kuwait, Qatar, and Bahrain’s sole avenue for shipping. All of Qatar’s LNG exports go through the strait, with no alternative means of conveying the fuel, according to the IEA. Along with the UAE, Qatar’s exports make up 20% of the world’s LNG consumption.